Starting the next session here with Old National Bancorp. Just want to thank everyone for being here. I have my old friend, Jim Ryan, up here. We've known each other for a long time. And Jim's the Chairman and CEO of the company. And I think what best thing for us to do, I think right now, is give us a description of Old National. I think most of you are familiar with the company, but some of you are not. And, we were talking about generalist investor interest, outside and hoping for a little bit more. So for those of you that aren't familiar with it, Jim, why don't you go ahead and give us a little bit on the company?
Sure. The first thing that I always have the opportunity to share is Old National turns 190 years old this year. We are in the exact same spot. We started the company 190 years ago in 1834 in Evansville, Indiana. Having said that, what what I will say is, the last five years have really been transformational. I had the opportunity to become CEO and Chairman just almost five years ago. Really, have transformed the company into better growth markets, really created a better sales organization and culture. Had the opportunity to hire in the last three years; we've hired 75 top talent relationship managers to join us in some key markets like places like Minneapolis, places like Chicago, places like Detroit, and Indianapolis, and really joining us out of some of our largest banks in our footprint.
And really have transformed how we think about the business. Having said that, Old National is always known to have this conservative credit culture that serves us incredibly well. So really low and stable net charge-offs, really consistent, and low, stable net charge-offs. And the hallmark of our company is we call it basic banking, old-fashioned basic banking. And what does that mean? It means we turn around and gather deposits up in our footprint and lend them back out. So, John, you can appreciate this. John Moran, our head of corporate development, has been trying to tell everybody that, boring is the new sexy. So in after what we saw in March and April, we think boring is probably better than having high concentrations or being overly exposed to one sector over another.
And so old-fashioned basic banking, we think, creates real value over the long term. And if you look at our return on average tangible common equity, you look at our risk profile, you know, we think we think we're creating real value for shareholders. Last year we were able to grow tangible book value by 17%. Ex-OCI, it was still 12%. We think with a reasonable dividend yield on top of that, that provides strong shareholder return. So, you know, what's in store for Old National? It's just more of the same, old-fashioned basic banking, you know, growing at our deposits in a really granular way. You know, our loan portfolio is incredibly granular. Our average loan size is under $2 million. Similarly on the deposit side, really long-tenured deposit relationships.
And that really helped us, whether it was the pandemic we had to navigate, which we'd never close the doors, continue to go off and be on the offense, or whether it was this March and April timeframe, which, you know, obviously everybody looked at our industry a little bit differently, post the failures. We continued to navigate incredibly well through that and continue to grow and never shut our doors in terms of new client opportunities. And quite frankly, that created opportunities because many of our regional peers were taking a pause, whether it was a Basel III, you know, diet or just making sure they had enough liquidity; it really allowed us to stay in the game. In fact, in the last three years, we produced record-adjusted results the last three years in a row.
You have to go back 20 years prior before you see that record again. We're really pleased with that, but it's old-fashioned basic banking. If you leave with anything today, hopefully you think boring is the new sexy.
I think you described it once in an investor meeting as oatmeal with a little bit of brown sugar.
Exactly.
Is that right?
Yeah, oatmeal with brown sugar.
You can use that next time. That's fine. From an economic point of view, touch a little bit on your markets, and we'll get into lending after that. But, you know, what are you seeing from the economy? It's obviously kind of a tension point between what we read every day, and that sometimes is different in terms of what you're seeing.
Yeah, what I would see is we've seen a lot of consistency across our markets. You know, these are, you know, highly concentrated manufacturing markets with, you know, individual entrepreneurs who run these companies. And, we've seen really not much change over the last couple of years. We've seen nice growth opportunities. You have markets like Chicago, which continue to drive a lot of the headlines in terms of demographic changes. And what I will say is places like Chicago, maybe aren't growing, but we have such small share of the total, and we're actually able to take share away, particularly from the new hires and our speed to market and our approach to banking. It really allows us to drive, you know, above-average growth. So even if that market's not going to grow, our small share and our ability to take share really allows us to grow.
Places like Minneapolis, I would say the same thing, maybe a little bit more dynamic, your hometown, than Chicago is. And I would say those are two great examples where the urban cores are challenged in terms of demographics. But you look at the suburban markets, there's still a great amount of growth happening in those suburban markets. You know, Michigan continues to produce strong results for us. We just added an office this last year in Detroit. And that's worked out really nicely. Places like St. Louis and Kansas City, which are relatively new entrants for us. Again, I'd put in that same kind of classic Midwestern market, lots of, you know, entrepreneurs, you know, owners who we do business with directly. You know, our classic customer is a small business owner that we know, we've known for 20 years in those marketplaces.
You know, we go to church with them, we go to see them at the grocery store, see them out. And those are our type of clients versus somebody that's trying to buy some type of credit or investment-grade credit or leveraged credit. It's just, you know, kind of old-fashioned basic, gets back to old-fashioned basic banking.
Okay. Lending environment, what are you seeing from a loan demand environment? Has it changed at all recently?
No.
I know you've laid out some guidance kind of near-term and longer-term and how you track.
Yeah, so, so we talked. Great question. We talked about this on our fourth quarter earnings call, really mid-single-digit kind of loan guidance for the full year. We think it's kind of equally spread. And that's really based on our pipelines. If you look at our pipelines, you know, heading into the year, we really feel like, you know, mid-single-digit growth makes a ton of sense. Maybe it's a little bit softer than we've seen the last couple of years. I think the challenge becomes, you know, uncertainty. We have uncertainty around the direction of interest rates, the shape of the curve, and then obviously the presidential election creates a lot of uncertainty. So if anybody's holding back, I think it's mostly due to uncertainty.
You know, we still see good loan demand, though, across our footprint, based on obviously the growth that we outlined in our guidance. And additionally, those 75 people we put on our books in the last three years, it takes them a year plus to kind of get ramped up. They're getting ramped up. And this is across wealth management and commercial banking mostly. And I think, as those folks get ramped up, that's really that opportunity to go out and steal share away from our competitors. And I think that's causing maybe slightly above-average growth, you know, vis-à-vis some of our peers.
Okay, good. Also, if anyone has questions, just put your hand up and we can definitely handle them. Commercial real estate is a hot topic. What are you seeing in terms of demand? You know, talk a little bit about your book and your exposure to commercial real estate as well.
Yeah, you know, much of our commercial real estate exposure really falls into well, first of all, there's a big chunk that's owner-occupied, right? We think that more is more kind of the C&I kind of classic category. In terms of the investor stuff, much of it falls in the multifamily and industrial warehouse space, both of which have held up really nicely. The multifamily product tends to be suburban multifamily, newer product. And there continues to be the structural deficit of new housing, particularly in the markets we serve. So that's held up. You know, it was interesting during COVID when we were all worried about, you know, what that because it tends to be a little bit more expensive than the housing that the rental housing you and I think of as we were coming up.
And, you know, occupancy rates have been incredibly strong there. There's still new projects coming online. Even at today's interest rates, there's still so much demand and they're able to do that. There's been a lot of talk about the refinance risk. You know, we automatically stress all of our deals for up 3%. And so if you think about where those things may have been originated to, you know, from 4%-7% today, which is kind of the roughly the rates we're talking about here, there's still, you know, when we originally underwrote those, we underwrote them to those kinds of standards. And then you think about the rent growth and the opportunities. So the cash flows, the debt service coverage leverages are still holding up very nicely, even upon renewal of these higher interest rates.
Okay. Competitive environment in Commercial Real Estate, is it competitive at all?
Yeah, I would say it's still competitive. I mean, you know, maybe we lost a couple of competitors along the way, but I would say it's still not like we have a cakewalk here for new opportunities. It's still definitely competitive. And, you know, we're really focused on client selection here. This is where it's so important to make sure you're doing business with the right organizations. And, you know, we're still competing for those organizations as hard as we ever have. If maybe one or two, you know, instead of having six, you have four that are out competing for the same business today. Still a lot of competition.
Okay. But still good activity, good competition.
Correct.
No big wall of maturity worry that you're thinking about?
No. As we look out and forecast, we don't have that many maturities coming due. And the ones we do, we already stress them for that up 300 and feel really good about, you know, what the new underwriting will look like once they go through.
Okay. Not on the question list, but is it frustrating as a banker to read some of the headlines?
It is very frustrating. I think sometimes education will go a long way in making sure we're getting the real truth and facts out there about the real estate. I think we know enough just to be dangerous sometimes in the reporting cycle. And everybody's looking for a salacious headline. So it is frustrating sometimes to see some of the headlines that are being written about commercial real estate out there. And obviously, not all commercial real estate is created equal. There's all sorts of risks created. There's a bunch of differences in even in the same market. If you're going to underwrite a multifamily project in downtown Minneapolis or one out in the suburbs, I think they're different types of risks. So it is frustrating. But, you know, the reality is, our industry will continue to navigate.
Our industry is very healthy overall, I believe. Yes, we have some banks that make the headlines here now and again. We're all frustrated by that because it feels like we're just opening the wound back up. But by and large, our industry is very healthy. If you if you go and look at the numbers and look at the charge-off history, other than some episodic kinds of credit losses as a whole, I think our industry is holding up very nicely.
Yeah, I would agree. Deposits. In fact, we're coming up on the one-year anniversary of having some fun with deposits. But talk about deposit pricing, what you're seeing in your markets. Has it changed at all? And just generally what you're seeing in terms of pricing.
Yeah, great question. Deposit pricing as a whole has gotten a little bit easier, a little bit easier. Having said that, you know, there are some smaller banks that can be thorns in your side relative to total deposit pricing. You know, our treasurer did an awesome job in making sure that, you know, we went out and we have roughly approximately 30% of our total deposit book has a special price to it. Otherwise, it's just the normal rack rates. And the rack rates are really unchanged from the big rate, you know, climb we had here. And most of that special price actually comes due over the next 12 months. So we really have the opportunity to take a look at that.
And we're really being really thoughtful about the opportunity to lower prices and test, you know, where we have more opportunities to lower prices versus others. And some places, you know, we're continuing to grow deposits. And on the margin, and we said this on our call, we're going to be unapologetic about growing core deposits. Because we do think that will continue to be a long-term differentiator between banks that are successful and banks that aren't. We've always had this really strong low-cost deposit franchise. And, you know, when rates were zero, it was tough to demonstrate value there. And we saw that in March and April. And it was interesting, you know, during March and April, well, we had a couple of weeks for Old National, which were, you know, we were concerned with the rest of the industry.
We sailed through that really smoothly overall and lost very little clients because we just don't have big exposure to uninsured deposits. The ones we did, we have long-tenure relationships with. It's really granular deposit base, which had, you know, serves us well in these kind of crazy, uncertain times. But I do think that that our ability to reprice our book will be better than what's our guidance was out there. We were on a 20% beta on the way down, which we think served is relatively conservative to some others that put up, you know, higher betas. But we think that's a realistic number to live up to and and gives us opportunity to grow the margin in the back half of the year.
Okay, good. And some of the promotional pricing or exception pricing, talk to us a little bit more about that. What do you expect? What do you have to do to test it? And what kind of expectations do you have?
Yeah, it you know, it's really interesting. It's almost a relationship-by-relationship conversation. We put in a lot of guardrails in place to make sure we didn't price up, you know, every single deposit en masse. And so I think we can be really tactical. Even if you're getting 10, 15, 20 basis points lower, you're still heading in the right direction. And that's what I think we have to think about as an industry. We're not just we didn't turn the rack rates up and we're not going to just turn them all off at the same time. And again, I think while maybe from some of the biggest competitors, deposits are not as competitive to go after, I do think a long-term, we've got to focus on continuing to grow deposits.
Particularly, we got to think about deposit growth, at least consistent with kind of our mid-single digit loan growth to make sure we're funding it on the margin, you know, with low-cost deposits.
Okay. Any updates on the non-interest-bearing targets that you have?
You know, we expect those numbers to slip a little bit, just kind of some late cycle repricing. It's definitely slowed quite a bit. But you know, those those things are moving around 1% or 2%. So we don't expect major changes there. And probably back to kind of, you know, I would say longer-term kinds of levels before, you know, after the deposits were cheap and easy for such a long period of time.
Okay, but almost over in terms of.
Yeah, I think almost over.
Okay, got it. The guide on the margin is still the same. No, no update there.
Yeah, guide on the margin is still the same. We think the inflection point is here in the first quarter, you know, kind of relatively flattish in the second quarter. And then, you know, growth in the back half of the year. We had assumed three rate cuts in our guidance. One thing that is interesting, though, in our original guidance, we didn't have the midpoint of the curve as high as it is today. So we have kind of +25 basis points. And for us, probably this the steepness of the yield curve and the midpoint of the curve is probably more relevant than it actually the short-term rate curve is. So, you know, banks historically like us price off that kind of five-year point.
So we've got kind of +25-30 basis points from that original guidance in terms of the middle part of the curve, which we think creates upside opportunities for us for the rest of the year.
Okay, and that was my next question. So, that that's good. So maybe a little bit a little bit of relief from that.
A little bit of relief from that.
Probably not six cuts, which is good.
I don't think six cuts. And we've been working really hard to get to neutral. And we're not quite there. We're very close to getting there. But by the middle part of the year, we should be pretty close to neutral. So whether it's, you know, when we ran our models, whether it was six cuts or three cuts, it was about the same, you know. And clearly, a more steep curve is better. And, you know, one or two cuts is helpful, but relatively indifferent.
Okay, okay, good. I want to talk about CapStar a little bit. It's interesting. Do we call it record time? Record approved time?
I don't know. Yeah, I don't.
Just give it, you know, give the audience a little bit on CapStar, what it is, how quickly you got it approved.
Sure.
And then we can talk about the market a little bit after that.
Yeah, so, you know, we weren't necessarily—let's start with, Old National wasn't necessarily looking for its next partner. However, this thing came along and we already have nine people that were sitting in the national market, seven of which were on the wealth management side that we attracted from, you know, super regional and two on the commercial side that had just joined us recently. And so when we saw this opportunity come along, we were—I was quite frankly skeptical that we were going to participate given its size and, you know, kind of where we're at in the cycle. We got in, we dug in, we realized this is a really clean bank with great growth opportunities.
While it's headquartered in Nashville, it also has offices across the state of Tennessee, including Knoxville and Chattanooga and Athens and then Asheville, North Carolina. Really, while it's only going to be, you know, call it 8% of our total assets today, I think it has an opportunity much, much bigger, going forward. And another reason why I think the asset growth opportunities are going to lead the way, we got to make sure we're following it with strong deposit growth, to make sure that, in our modeling, we never price in revenue synergies as we think about these things. But clearly, this is an organization which needed to find a partner and can provide more capital and more funding for allowing them to grow. They have some great team members in the commercial and wealth space.
And we feel like we can really unleash them. And they're excited about joining our team. I was just with them all last week. They're excited about joining our team. And I think that ability to close it a little bit earlier than we anticipate, which is kind of marginal better to our model, not materially better to the model, will be helpful. And I think this is an important lesson that we've always tried to have great regulatory relationships. You know, obviously we wanted to preview this before we even thought about going down this path, which we do. And I, you know, I think we're one of the few organizations, at least that, you know, we're showing them opportunities that are way ahead of what we actually think we might execute on something.
And so we're just that constant dialogue about what those opportunities look like. And so they were familiar with, you know, our strategy, familiar with what we want to do. And we're able to be consistent with what we said. And you know, we run a really, what we think is a really clean shop relative to regulatory relationships and follow-ups and items they have for us. And so that application went in, I think it's kind of four months from application time. And so we were really pleased. We went off and also made sure that, you know, we think about our community partners and benefiting the underserved communities.
We went off and we worked with a national organization called NCRC and went off and worked with them to help us figure out how we can make, you know, all of Tennessee better as a result of this partnership. I think that helps with the regulatory approval process being proactive on that front. You know, very little overlap. So not a lot of, you know, lost content there. You know, we're adding some branches to the footprint, particularly in the underserved markets. Again, that's a good thing to do when you're looking at the regulatory approval process. So we're really, really pleased to get it done. And I don't know if it was a record or not, but we were pleased. And I think it's just a testament to the reason why you have strong regulatory relationships.
Yeah, okay. We have a question here from Ashley, but I just joke with you a little bit. You're the bank of Big Ten country. Did you need Big Ten approval to go to national?
I know that's a good question. Yeah, I joke with John because I'm going to be in Minneapolis the next two weeks. We've got the women's tournament and the Big Ten women's tournament in Minneapolis sold out, by the way. I don't know if it's ever been sold out before, but what an exciting thing to see Caitlin and all that's going to go on there. And then we're heading back up for the men's tournament the following week. So we're happy to be the bank of the Big Ten. It's been an awesome partnership for us, particularly as the Big Ten continues to be a stronger, you know, conference.
Oregon, Washington, and California are next.
Well, we're not going there, but, yeah.
Ashley, go ahead.
Thanks. Jim, this is my first exposure to you guys. So you may have talked about this already elsewhere. When you think about the context of scale and like everyone tends to get assets, and I'm curious for how you view where, where you guys fit into that. And there's different perspectives on how the industry might evolve in terms of sort of like bifurcation and you have bigger and smaller and not sure what's in the middle. So I'd be curious for your thoughts on that, generally speaking, and then how it applies to you.
I think it's a great question. It's a question that's incredibly relevant in today's market. I feel like at $50 billion, there's a couple of sweet spots in banking. I think at $50 billion is kind of a sweet spot of banking. You look at our return profile, you look at our ability to navigate, you know, change, you look at our ability to invest in ourselves, both in talent and technology. We have enough scale to be able to do all of those things and produce, you know, high high returns. Then I think you get obviously to $100 billion, which is a no-fly zone in today's environment, right? And then as I talk to my, you know, brother and that are up in the $200 billion range, they're all talking about how do we be a $1 trillion bank?
I think it's the SIFIs, and I think it's us. I think we are really in the sweet spot of banking right now, which is kind of a weird space to be, but there's not that many between us and, you know, the biggest banks in the country. And I think at the it's tough at that $10-$15 billion range. I think it's a tough space to be. But I think we've finally gotten there and we feel like we've finally achieved scale and finally have the growth opportunity and make all the necessary investments in technology and, more importantly, attract the talent. I mean, the talent attraction with the 75 people, you know, may not sound a lot to, you know, some of the folks in the room. But I'm telling you, these are quality people.
These are top decile, top quartile performers across our footprint that are really changing the growth dynamics of our company. I think at $75 or $50 billion, that gives us the opportunity to do that.
Okay, good. So $100 billion, just no-go zone, you don't even think about it or?
I don't even think about it right now. There is no way. And, you know, I do think as fast as $100 billion came as a demarcation line, it could go away. But we don't want to come anywhere near the no-fly zone, which is obviously much, much less than that. And, you know, we put up, like I said, 17% tangible book value growth last year. I feel really comfortable being able to do that. You know, again, you know, ex-OCI was 12%, but continue to do that and not have to rely on it. And the good news is, you know, M&A is often a tool to fix something. You're trying to fix succession planning, you're trying to fix a balance sheet issue, you're trying to fix a growth issue. We have none of those issues.
We have a really young, vibrant management team that has great growth potential with strong efficiency ratio, great returns, and I just I don't think we're looking to solve anything through M&A.
Okay, good. You touched on commercial real estate before. It doesn't sound like you have any major concerns there. Anything else on credit to note? What are you generally seeing from your borrowers?
I, you know, the Midwest continues to be strong. I think those that have avoided those softest pockets, the central business district areas, whether it be hospitality or office, which we have, I think 1% of our total exposure is in central business district office. We really just have minimal exposure. I think those are the pockets that I see in the Midwest. I can't, you know, give you a perspective across the country. But for us, those suburban, you know, communities, those the smaller, you know, tier two communities continue to by and large operate the way they have before. And, you know, like I said, we're still seeing growth opportunities, you know, both in the industrial warehouse space and the multifamily product, particularly the multifamily product.
You know, given where rents have, you know, trended over time, they can still make deals work, which is good. We're doing fewer of them. Few of them are going to have enough because they're what's interesting is that, you know, oftentimes these developers are putting more equity into the deals. And that's how they're making up for the higher rate environment.
Okay. It's all right to be a little bit speechless on credit. You know, kind of thinking through it.
Right.
How strenuous are you with your reserves? Talk about that. What kind of stress testing and, you know, qualitative measure factors do you have in there?
Great question. Actually, you know, during COVID, we moved to the Moody's S3 scenario in terms of our reserve setting. We felt like it was a prudent thing to do. There were lots of questions around whether we should have moved off that or not. In fact, we were kind of getting to that point maybe in the beginning part of last year where there were some questions around that we could maintain, you know, the higher level reserves. And we decided to continue to maintain those. And obviously it gave us a lot of air cover what happened in the beginning part of the year. So we feel like we're, you know, appropriately reserved. We feel like that's the right place to be. Having said that, we use our stress testing work internally to really drive a lot of our major decisioning.
Any strategic decision is really run through that stress test model. So, we feel confident that we've got the right capital. You know, we have this really long history of relatively low charge-off to our peers. And while we've acquired banks like First Midwest and others along the path, you know, we get in really early. Risk identification is a big part of our strategy. We want to get in early. We want to identify risk before it's a problem. And oftentimes, you know, we make a determination whether this is a credit we want to continue to work with or this is a credit we should find another partner for. And I think that early risk identification has really helped us navigate and turn in, you know, much better loss content, vis-à-vis our industry peers.
Okay. The buyback, you have a new authorization out there. It came out shortly after your deal approval. How aggressive do you want to be with that or what's the logic behind it?
Yeah, it's a great question. So we're really just replacing the buyback that was already in place. And our tangible common equity ratio was around 7.85, 6.85, 6.85, thank you, 6.85, at quarter end. And so, 7% is a number that we're watching. And we really like to be north of 7%. And so I think while I have said this earlier today with some meetings with investors, it's really data dependent. And I think it gives us how the rest of the year plays out. Do our assumptions come true? We're obviously going to build capital throughout the year. We have strong capital, you know, retention. And so I think in the back half of the year, it certainly could be a tool we utilize.
You know, but it'll depend on where the economy is at and, you know, what our stock price is doing at the time. But it's a tool that I think will be a good tool for us, just to help manage kind of capital accumulation and return back to shareholders.
Okay. Any other questions? All right. Last minute or so, anything to call out on fees, fee income? How are things tracking and where do you see some of the opportunities?
You know, clearly mortgage continues to be a tough spot. One area that we continue to invest heavily in is our wealth management business. And that, you know, the investment lead time is a little bit more there, but we've put a lot of investment in leadership, a lot of investment in some new products, new talent to help drive that. We feel really bullish about, you know, wealth management for a long term. We've, you know, historically have focused on kind of more retail type asset management, but we've added high net worth teams to help us. You know, Nashville is an example where we built a high net worth team and they've already had tremendous success. They went from zero to about $500 million in assets under management in kind of 18 months. And so they were able to really grow quickly in that space.
That would be one area that I look for a source of growth. You know, treasury management, capital markets continue to be great spots for us. You know, the service charge programs are under pressure as we all know and probably will remain under pressure, but we're really long-term bullish on our ability on the treasury management side and, wealth management side.
Okay. But same same guide, same yeah.
Same absolute guide. You know, kind of, mid-single digit plus growth in those categories.
Okay. I think we'll wrap it up there. Anything else that you want to touch on or?
No. I think so much. Appreciate it.
Good. Thank you, Jim.
Have a great day.
Yep. Thanks, everyone.